RANDS AND SENSE:
Talking about budgets is often the starting point in the financial education of children. Although budgeting can help you to live within your means and stay solvent, only investing will help you to become wealthy and financially independent one day.
However, there is often a lot of jargon in the investment world, which is perhaps why we often don’t explain it to kids. Here are five investment basics for kids in plain language anyone can understand.
1. Saving is for the short term, investing is for the long run
Setting money aside monthly for unexpected expenses is a good start. As the past few months have taught us, an emergency fund is essential.
Because you might need this money at any time, you don’t want to invest it in anything where the value will fluctuate too much, or where you can’t access it at short notice. This money should be kept in an easily accessible form, such as a savings account or a money market fund. However, if you want to save for bigger long-term goals, you will have to give your investment enough time to grow and invest in something that offers a higher return on investment than cash or money markets.
2. Time is the secret ingredient when it comes to growing wealth
Very few people become wealthy overnight. Listening to the stories of great business people, it soon becomes clear that a lot of hard work preceded their “overnight success”.
The same applies to money. Every year’s gains add to that of the years that came before, and these gains add up. The key is not to give up or touch this money too soon. If you planned to invest your money for a certain time, it is usually best to stick to your plan unless something material has changed.
3. Invest in the right things for the right reason
This is the part that seems to trip up many people.
We are often asked “what is the best investment?” There is no such thing (with a few caveats I’ll get to last). The right investment is one that will do what you need it to do.
If you need an emergency fund, the right investment is one you can access quickly and where what you get out is more or less what you put in. But if you are investing for retirement, accessing it now is not important. You also don’t want to get back only what you put in, because in 30 years’ time that money won’t buy you much, because things get more expensive due to inflation. You want your money to grow faster than inflation, so you can buy the same things (and perhaps even more) in 30 years’ time.
4. Asset class ABCs
Asset classes are a way of sorting the things (instruments) we can invest in into groups by how they tend to behave.
There are four basic types: cash, bonds, property and equities. Less risky assets give you lower returns, while more risky ones provide higher returns in the long run. Risk can sometimes mean losing money, but mostly it means an asset does not behave as expected. The least risky assets are cash and money markets, but they typically offer the lowest returns over the long run.
Bond investments pay an agreed interest rate over an agreed period, and this is typically a higher rate than you can get from cash investments. Property investments are more risky than cash and bonds but tend to offer higher returns. In addition to residential property, you can invest in things such as shopping centres or office complexes, where people pay rent.
When it comes to building wealth in the long term, however, shares - also known as equities - are the place to be.
These are like owning a part of a company. However, share prices move up and down all the time, sometimes by up to 30%, as we have seen recently. Because of this, it is often better to hold a balanced or multi-asset portfolio. This just means you combine all the asset classes to get the best of all worlds - more return for less risk.
5. Choose whom you trust with care
Although each type of investment has its place, not all investment services providers are a safe bet. Some might be outright dishonest, others might be incompetent. Be careful of anyone promising fantastic returns in a short space of time (as you’ve just learnt, making money takes time!)
Always check the person you entrust your money to can be trusted, and invest with a company you know, and that is covered by solid regulations.
Source: Anet Ahern - PSG Asset Management.
PERSONAL FINANCE
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